Biglari Holdings Inc. — Form 10-Q Summary
Business Context and Reporting Period
Biglari Holdings is a diversified holding company with restaurant operations, property and casualty insurance, oil and gas, and licensing and media businesses. The company is led by Sardar Biglari, who held approximately 66.3% of the economic interest and 70.4% of the voting interest as of June 30, 2023. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods.
On June 14, 2023, the company acquired the remaining 10% of Abraxas Petroleum, bringing its ownership to 100%.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Total revenue | $93.5 million | $92.4 million | $183.7 million | $177.7 million |
| Pre-tax earnings (loss) | $2.9 million | $(96.5) million | $88.2 million | $(97.0) million |
| Net earnings (loss) attributable to shareholders | $1.9 million | $(73.8) million | $66.8 million | $(74.1) million |
| Earnings per equivalent Class A share | $6.64 | $(244.37) | $229.00 | $(244.29) |
| Operating cash flow | — | — | $31.5 million | $34.2 million |
Reported earnings were substantially affected by investment partnership results. Investment partnership gains were $65.1 million for the first six months of 2023 versus a $111.9 million loss in 2022; the partnerships recorded a $7.5 million loss in the second quarter of 2023 versus a $105.2 million loss in the prior-year quarter. Management states that market-driven investment gains and losses will continue to create significant earnings volatility.
- Restaurant revenue increased 6.9% in the second quarter and 4.5% in the first six months. Restaurant pre-tax earnings increased to $9.2 million and $17.0 million, respectively, from $4.0 million and $8.4 million.
- Insurance revenue increased to $33.8 million for the first six months, while pre-tax earnings increased to $6.8 million from $3.8 million. First Guard materially improved its loss ratio; Southern Pioneer remained unprofitable on an underwriting basis.
- Oil and gas revenue declined to $23.0 million from $24.3 million, and pre-tax earnings declined to $5.0 million from $12.3 million, primarily reflecting lower commodity prices. Abraxas contributed $13.2 million of first-half revenue and $3.1 million of pre-tax earnings in 2023.
- Licensing and media revenue declined to $1.4 million from $1.9 million, while pre-tax earnings increased to $0.3 million from $0.2 million.
Balance Sheet, Cash Flow, Debt, and Liquidity
| Balance sheet item | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $30.9 million | $37.5 million |
| Investments | $88.3 million | $69.5 million |
| Investment partnerships | $228.7 million | $155.8 million |
| Total assets | $890.0 million | $828.5 million |
| Total liabilities | $273.6 million | $272.9 million |
| Total shareholders’ equity | $616.4 million | $555.6 million |
Cash, cash equivalents, and restricted cash decreased by $6.3 million during the first six months. Operating cash flow was $31.5 million, investing activities used $28.5 million, and financing activities used $9.5 million. Capital expenditures were $10.6 million, while proceeds from property disposals were $9.7 million. The company also paid $5.4 million to acquire the remaining noncontrolling interest in Abraxas Petroleum.
The company had $3.6 million outstanding under a $30.0 million revolving line of credit at June 30, 2023, compared with $10.0 million at year-end 2022. The facility matures September 12, 2024, carried a 7.8% interest rate at quarter-end, and was subject to financial covenants with which the company reported compliance. Lease obligations totaled $105.1 million, including current and long-term obligations. Western Sizzlin had no revolver borrowings.
Material Changes Versus the Prior Comparable Period
- Net earnings attributable to shareholders changed from a $73.8 million loss in the second quarter of 2022 to $1.9 million of earnings; first-half results changed from a $74.1 million loss to $66.8 million of earnings.
- Operating businesses improved modestly in the first half, with after-tax contribution of $13.7 million versus $13.7 million in 2022; stronger restaurant and insurance results offset weaker oil and gas performance and higher corporate costs.
- Restaurant operations reduced total stores to 521 from 545 at December 31, 2022 and 560 at June 30, 2022. Steak n Shake continued transitioning company-operated stores to franchise partners and had 30 closed company-operated stores at quarter-end.
- Restaurant operating costs declined to 49.4% of net sales in the first half from 53.2%, while first-half restaurant selling, general, and administrative expenses rose to $23.2 million from $25.3 million but increased as a percentage of revenue because of the revenue mix.
- First Guard’s first-half loss ratio improved to 52.4% from 65.7%. Southern Pioneer’s underwriting loss was $0.6 million, compared with a $0.6 million loss in 2022, driven by weather-related losses and elevated expenses associated with a new policy administration system.
- Oil and gas results were pressured by lower commodity prices; average West Texas Intermediate prices were approximately $74.86 per barrel in the first half of 2023 versus $101.66 in 2022.
- The company recorded $1.6 million of first-half impairment charges related primarily to underperforming restaurants, versus nominal charges in 2022.
Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal revenue, earnings, or capital expenditure guidance. Management expects investment partnership gains and losses to remain volatile because they reflect changes in the market value of underlying securities, including unrealized gains and losses.
- Oil and gas results remain highly sensitive to volatile oil and natural gas prices.
- Insurance results depend on claim severity, weather-related losses, inflation in claim costs, reserve estimates, and underwriting performance. Southern Pioneer’s underwriting ratio exceeded 100% in both periods.
- Restaurant performance is affected by store closures, refranchising, same-store sales, labor and food costs, occupancy costs, and the shift from company-operated revenue to profit-sharing franchise partner revenue.
- Insurance claim liabilities include estimates for incurred-but-not-reported claims. Prior-year reserve releases were $3.0 million in the first half of 2023 versus $0.8 million in 2022.
- Corporate and other expenses increased partly because of a $1.0 million non-cash receivable write-down and accrued incentive fees.
- The company has various legal proceedings and unresolved claims but believes any liability beyond recorded amounts is unlikely to materially affect operations, financial position, or cash flow.
- Related-party arrangements include a service agreement with Biglari Enterprises, owned by Mr. Biglari; the company paid $4.2 million in service fees during each first-half period.
- Investment and capital allocation decisions are centralized with Mr. Biglari, creating key-person, control, and related-party governance considerations.
Important Facts for Investors to Verify
- Whether investment partnership gains are sustainable or primarily reflect unrealized market movements and whether deferred taxes will become payable upon partnership dissolution.
- The valuation and liquidity of the investment partnerships, including the portion attributable to Biglari Holdings common stock held by those partnerships.
- Progress and economics of Steak n Shake’s refranchising strategy, including closed stores, property sales, franchise partner profitability, and future revenue mix.
- First Guard’s improved loss ratio and whether Southern Pioneer can return to profitable underwriting after weather losses and policy-system costs.
- Abraxas Petroleum’s production, reserves, capital requirements, and sensitivity to commodity prices following the purchase of the remaining ownership interest.
- Compliance with the $30.0 million revolving credit facility’s covenants and the company’s ability to fund lease obligations, insurance claims, capital expenditures, and investments.
- The assumptions supporting restaurant impairment testing, insurance reserves, deferred taxes, and other significant estimates.